Medical Marijuana Dispensaries Cannot Make Normal Tax Deductions

In an IRS for tax ruling last week, precedent was set for medical marijuana dispensaries. And it was not a good one at all. The Vapor Room, which was a medical marijuana dispensary in California, lost a ruling in IRS tax court last week. The IRS had previously hit the Vapor Room with a $2.1 million tax bill, saying that because marijuana is federally illegal, they were not eligible to make normal tax deductions.

When a normal business files for its taxes, it subtracts off the gross revenue normal business tax deductions such as wages, utilities, rent, and other business expenses. One of the largest business expenses typically deducted is the cost of goods sold.

In the case of a medical marijuana dispensary, the cost of goods sold would be that of the marijuana that is being sold to patients. In addition, there would be all the other typical business expenses such as the wages of people working the dispensary, utilities to grow the marijuana with the light bill, and so forth.

In the IRS tax court, the ruling was that since a medical marijuana dispensary is federally illegal, they are therefore dealing in a controlled substance and are therefore not eligible to deduct any of the normal deductions that a business would take. That would mean that the business would have to pay taxes off of the top line gross revenue number as opposed to the bottom line net income number.

In the case of the Vapor Room, this amounted to over $2 million difference of taxes owed in just a few years.

With medical marijuana dispensaries coming on board in the state of Arizona within the next six months, this ruling sets a precedent that could vastly change the landscape of dispensaries tax requirements. If an Arizona medical marijuana dispensary in the state decides to use a normal profit and loss statement to calculate the amount of taxes it owes, the IRS could easily decide they owe a significant amount more. And with this new precedent having been set, it would be extremely difficult to fight that in Tax Court.

One additional component of the ruling was the judges denial of the Vapor Room being able to deduct medical care of patients. In a previous tax court ruling, a judge allowed a dispensary to deduct the medical care of patients as it was completely separate from the dispensaries marijuana sales. In the state of Arizona, dispensaries are not allowed to perform evaluations of patients to receive medical marijuana cards, or have ancillary services in the dispensary such as massage treatments and the like.

It will be very interesting to see what additional ways dispensaries are able to try and deduct some of the revenue coming in.

If you are a person suffering from a debilitating condition in the state of Arizona such as chronic pain or severe nausea and vomiting, migraines are any of the 13 acceptable conditions, let Arizona MMC help you with your evaluation for an Arizona medical marijuana card. The office will obtain your medical records at no charge, take your photo ID, and upload your application to the state all included with the one low price.